This is a very difficult stock market to "read" right now, as a number of
cross-currents have arrived at more or less the same time. First, there is
the bullish seasonality of the end of the month (August) and the days
leading up to a major holiday (Labor Day). There is also the potentially
bearish price of oil-related products in the wake of the devastating
Hurricane Katrina. Furthermore, the dollar has collapsed once again, for
reasons also probably related to the hurricane: it's unlikely that the Fed
will raise interest rates much more now, until the damage is clearly
assessed. However, the Bond market wasn't buying that argument as it
did not rally.
Through the mist and fog of these sometimes contradictory facts,
we must rely on our technical indicators. As one might expect, they are
not exactly crystal clear, either. First, consider the action of the major
indices. Massive buy programs in the last hour and a half on Wednesday
(the last day of August) changed what had been a bearish picture up to
that time. $SPX broke out above its month-long downtrend line on
Thursday morning, but couldn't hold the gains. Moreover, it is now
hovering right at the declining 20- and 50-day moving averages, all of
which are in the 1220 - 1222 area. Any clear upside close above there
(say, above 1225) would be bullish, from a price perspective -- which is,
after all, the one true measure.
Equity-only put-call ratios have not been impressed, however, and
these important psychological indicators remain on sell signals, despite
the month-end bullish window dressing. It is true that they are 21-day
moving averages and thus might not be as quick to roll over to buy
signals as some of the other indicators. Still, without confirmation from
them, we would not expect any rally to get very far.
Market breadth has improved in this latest rally phase. Breadth
hasn't given a new signal in a while, but this recent action is
certainly more bullish than bearish.
Finally, volatility ($VIX) finally broke down in the August 31st
rally and interrupted its nearly month-long rally. That has the potential
to be bullish, but we would like to see some follow-through (there was
none on Thursday, as $VIX rose). If $VIX fell below 11.50, or at least
12.00, that would be bullish for the broad market.
In summary, we don't really have any buy signals from our
indicators, nor did we have any serious oversold conditions before this
rally. It is usually the case that a rally without confirmation from these
indicators has trouble holding on. Since Friday is the last trading day
before the holiday, we may see more attempts to rally the market today,
but I think it would behoove all traders to see how next week unfolds (in
early action, on Tuesday and Wednesday) before trying to declare any
long-term forecasts for the broad market. There have been many times
in the past when August saw a late rally, only to see it obliterated by
heavy selling once the full cadre of traders returns after Labor Day. We
are certainly not convinced that this rally is for real, but we wouldn't
fight any clear breakout to new relative highs above 1223-1225, basis
$SPX.
